As I read the various reports coming out of the Virgin Islands regarding tourism concerns, issues and activities, I can't help but reflect a little on the situation and put a few thoughts to paper. One issue that I feel needs to be more clearly understood and considered is the impact of frequent flyers on V.I. airline capacity, airfares and promotion. The information presented relates only to St. Thomas, but the St. Croix situation is similar — perhaps even more dramatic.
The latest four quarters for which I have evaluated federal Department of Transportation Origin and Destination (O&D) sample data are from July 1, 1999, through June 30, 2000. In this one-year period, the number of long-haul passengers deplaning or enplaning on St. Thomas on all regularly scheduled flights totaled 655,330 one-way passengers, or 327,665 round-trip passengers. This number represents 74.2 percent of total air carrier passengers, except for those aboard charter flights, in the St. Thomas market (long-haul and inter-island) for that period and 92.4 percent of all air carrier passenger service revenues generated.
Inter-island traffic — between St. Thomas and St. Croix, and between St. Thomas and San Juan — accounted for 227,280 deplaning or enplaning passengers, or 113,640 inter-island round trip passengers. They accounted for 25.8 percent of total passengers and 7.6 percent of total airline revenues.
My comments and observations will essentially relate to the long-haul passengers, who are primarily visitors.
Of the 655,330 long-haul passengers to or from St. Thomas, 112,380, or 17 percent, were frequent flyers traveling on "free" tickets.
Frequent flyers are mainly people who have accumulated mileage as business travelers. As paying passengers, they account for about 30 percent of all airline travelers, yet they contribute about 70 percent of total airline revenues. For the major airlines, the sun rises and sets on these business travelers who must travel according to an often-inelastic schedule and thus must often to pay exorbitant airfares. The trade-off for the business traveler's costly itinerary is mileage credits and "free tickets" — and, often, "free" hotel stays — that he/she can use for vacation travel to attractive leisure markets such as the Virgin Islands.
The impact of frequent flyers on V.I. airfares
For all regularly scheduled carriers combined during the 12-month period, long-haul passengers to and from St. Thomas paid an average one-way airfare of $241. However, when we extract the non-revenue frequent flyers from the number transported, the average one-way fare for the paying passengers jumps to $290, an increase of 20.3 percent over the "average" airfare often cited by the carriers. The scenario with regard to specific airlines can be more dramatic.
American Airlines, the dominant Caribbean carrier, technically offers service to St. Thomas from about 179 markets through its hub-and-spoke system. During the period evaluated, AA carried 397,150 O&D passengers (198,575 round-trip passengers) to or from St. Thomas at an average one-way airfare of $240. However, extract the 55,560 AA frequent flyers (14 percent), and the average one-way fare for paying passengers becomes $280 — an increase of 17 percent over the "average" fare. Ever wonder why we have a hard time selling the Virgin Islands to potential paying travelers?
In 41 of American's markets, frequent flyers to/from St. Thomas account for 11 percent to 21 percent of all passengers. In these markets the "average" one-way fare is $224, but extract the frequent flyer non-revenue passengers, and average one-way airfare for the paying passenger in these markets is $316, or 41.1 percent above the "average" fare.
In another 56 of American's markets, frequent flyers to/from St. Thomas account for more than 21 percent of all passengers. In these markets the "average" one-way airfare is $253, but without counting the frequent flyers, the average one-way airfare for fare-paying passengers jumps to $384, or 51.8 percent higher than the "average" airfare.
Consider the Los Angeles – St. Thomas market
The Los Angeles (LAX) St. Thomas market is one of AA's 56 markets with more than 21 percent frequent flyer passengers. In this market, for the period studied, American carried 8,020 passengers arriving or departing St. Thomas at an average one way-fare of $302. Deduct the 29.4 percent of AA passengers who are frequent flyers in this market, and the average one-way paid fare becomes $428, which is 42 percent above the overall "average."
In the same market during the same period, another major V.I. carrier, Delta, transported 1,440 passengers, 51 percent of whom were frequent flyers. The overall average Delta one-way fare in the LAX/STT market was $225. But the average for paying passengers one-way was $456, or 102 percent above the overall "average" one-way fare. That's more than double the overall "average."
Continental transported 360 L.A. market passengers to or from St. Thomas. Of these, 53 percent were frequent flyers. The overall "average" one-way fare was $168, but for paying passenger, it was $357, or 113 percent above that.
United transported 480 L.A. market passengers to or from St. Thomas. Of these, 52 percent were frequent flyers. The overall "average" one-way fare was $222, while for paying passenger it was $464, or 109 percent above that.
The LAX/STT market accounted for a total of 11,380 one-way passengers during the period. Of these, 3,670, or about 32.2 percent, were non-revenue frequent flyers, who also in many cases likely got free hotel room-nights at V.I. hotels. This is just one example; there are many such markets.
Of course, airlines really don't give "free" tickets to frequent flyers; they earn the revenue for these tickets indirectly on routes dominated by business travel that are critical to their core business strategy. The "free" ticket to the V.I. will have cost the frequent business traveler or his/her company double or triple what he/she should have reasonably paid for air transportation because of airline revenue structures targeted to extract the highest possible fares from business passengers (and leisure passengers in certain markets with little competition).
Since the idea of a "free" vacation in the Virgin Islands is appealing to the business passenger, the need to accumulate mileage keeps the passenger hooked on his/her favorite airline. This is just what the frequent flyer program is intended to do, and it works — for the airline.
So what if the Virgin Islands has to endure higher airfares and become generally less competitive to the consumer in the process? So what if V.I. hotels are forced to "give away" rooms at rock-bottom prices in order to realize even moderate occupancy rates and lackluster financial performance? So what if the territory funds and staffs Tourism offices in a region such as L.A. where a third of all passengers to the VI are traveling on "free" tickets?
'Not my problem, mon,' say the airlines, and they're right!
Here are the frequent flyer percentages for American Airlines in a few key markets where the territory is promoted heavily: Boston 14.5 percent, Charlotte 62.9 percent, Washington/Reagan 23.3 percent, Washington/Dulles 17.9 percent, New York/JFK 11.5 percent, L.A. 29.4 percent, Chicago 21.6 percent, Pittsburgh 23.5 percent, Providence 17.4 percent.
And for Delta: Atlanta 25.9 percent, Hartford 16.3 percent, Boston 40.4 percent, Cincinnati 29.2 percent, Washington/Reagan 32.6 percent, Denver 34.1 percent, Dallas 45.4 percent. And these are just a few examples.
Do our promotional campaigns simply reinforce the business passenger's use of his/her favorite airline, at premium prices, in order to accumulate the mileage for a free trip to the V.I. (and free hotel nights)? Have our off-sho
re Tourism offices become information centers primarily for these frequent flyers?
These are not the airlines' problems. The frequent flyer programs are working as they were designed to work, in the best interest of the airlines. The problems are the Virgin Islands' problems, and they will get worse. They should be recognized as fundamental economic issues that must be understood and addressed as a matter of high priority, unless we want to remain a marketing give-away program for the major airlines and their frequent flyers.
The territory has an excellent tourism product that has fundamentally solid value and can very effectively be sold in the domestic and international marketplace. However, the distribution system (air service options) upon which our tourism product depends is severely limited, without meaningful alternatives, and focused upon what is best for the airlines' shareholders and frequent flyers, regardless of the economic fallout that may impact the Virgin Islands.
Change the transport system, or compete with it?
At some point, this scenario will have to change if the V.I. is to realize the full value of its tourism product. It is up to the territory to comprehend and implement the potential remedies that can offset the frequent flyer problem: Either the current air transport system has got to be better understood and made to work in our favor, or a competitive air service alternative must be devised and implemented. There are practical remedies that can be applied in both cases.
The major carriers offer only limited, and seasonally fluctuating, air capacity to and from the V.I. And yet, they make such a high percentage of this limited capacity available to frequent flyers, while requiring paying passengers to absorb airfares much higher than "average" for the market.
With more competition expected to come, the airlines will become more aggressive with their frequent flyer programs so as to secure the allegiance of business passengers.
How will V.I. tourism fare under an even more burdensome frequent flyer award program? The territory should not be expected, nor simply accept, to "give away" a substantial portion of its already limited airline and resort capacity to passengers from whom the airlines have already extracted their pound of flesh. It may be the airline's seat, but it is also the Virgin Islands' product — and some recognition of that relationship must be forthcoming.
The V.I. should not be a retreat for frequent flyers to recover from the wounds of airline price gouging on their business travel. Meanwhile, those who are considering the territory as a paid-ticket travel destination should not have to absorb non-competitive airfares designed effectively to subsidize the revenue shortfall supposedly experienced by the airline because of the large number of frequent flyers occupying the limited capacity on V.I. routes.
As the global tourism environment becomes even more competitive, it is important that V.I. public- and private-sector tourism authorities review, and understand, the factors that affect their product and its distribution — and that they be willing to consider, and aggressively pursue, the remedies available to address and resolve these critical economic issues. Effective remedies that are both economically and politically palatable can be pursued for short- and long-term relief.
To avail itself of these remedies, the Virgin Islands must first believe in the inherent value and consumer appeal of its tourism product and then begin to exhibit a much higher level of confidence in matters relating to its development, promotion and distribution. The V.I. is a highly desirable destination with limited resources; it must be aggressively and competitively sold to a well-targeted clientele that will appreciate its value and have reasonable access to its shores.
Giving lip service to the "importance of tourism" has run its course over the past years, and the results of such passive attitudes are not encouraging. It is high time that the V.I. recognize tourism as a valuable but limited asset from which it must extract optimum benefits in support of the territory's economy. We've promoted tourism with the slogan "They're Your Islands." You can be sure that the major airlines are taking that slogan seriously — for their own purposes! We must first recognize and appreciate at home that "They're our Islands."
If we want to give something to our youth, let us give them an economic future to which they can enthusiastically look forward. A clearly understood and defined policy and program optimizing the Virgin Islands tourism product that is aggressively implemented will go a long way toward achieving this end.
Editor's note: Ralph Blanchard, an air service development consultant, was born and raised on St. Thomas and has some 25 years of experience in civil aviation management. He has sought since 1984 to establish a long-haul territorial airline, pursuing the project fulltime for five years and part-time since then. He and his wife, Geraldine, own a travel agency in Melbourne, Fla., and a tour operator business scheduled to begin dual-destination charter service between St. Thomas and Orlando in July.
